Whistle-Blowers

The pharmaceutical industry arouses conflicting emotions. Anti-vivisectionists, fringe medical practitioners and food faddists all tend to hate it, while the rest of us are periodically alarmed by the drug disasters that occur and the extent of drug-induced disease. The commercial practices of the industry also provoke concern: complaints arise continuously about price-gouging, market-rigging, profiteering, tax avoidance, misleading advertising claims and a whole host of unsavoury promotional techniques. Against these charges must be set the immense benefits wrought by the succession of wonder drugs that have appeared since prontosil (the forerunner of penicillin) ushered in the antibiotic revolution in 1935. The world would be a sicker and more dangerous place if the industry did not exist. Life expectancy would everywhere be shorter and far more people would be in pain. There is no doubt that on balance drug firms do more good – indeed, far more good – than harm. It is important to keep this in mind when considering these four books, all of which show the industry in dire need of reform.

Stanley Adams is an Oxford graduate of Maltese descent who, following sudden imprisonment, lost his wife, his earning power and nearly all his material possessions. He now lives on supplementary benefit in a small London flat, with the rent paid by the Borough of Camden. His downfall began in Basle in 1973. Adams was then working for Hoffmann-La Roche, the giant multinational drug firm which dominates the vitamin trade and is best known for the two most widely prescribed tranquillisers, Valium and Librium. Adams had been with the firm for ten years and had always been treated well, but he had become alarmed by Roche’s trading practices and reported them to the European Commission. Switzerland had just concluded a Free Trade Agreement with the Common Market, and this meant that the country would henceforth be bound by the EEC’s rules of competition. Although Switzerland itself had competition laws, Adams felt it was pointless to resort to them because of Roche’s immense influence in the country.

The Article in the Treaty of Rome which dealt with this subject was vaguely worded – it merely forbade any firm to ‘abuse a dominant position’ in the market – and had never been tested. Adams was the guinea pig that enabled the Commission to see how far it could go. Clearly, it did not think it could go very far, given that the most important charges made by Adams were not taken up at all. These dealt with price-fixing and production agreements which, Adams alleged, Roche had made with other firms in order to secure its domination of the vitamin market. Though Adams was able to provide inside knowledge, the Commission did not feel his evidence was sufficient to make the charges stick. All it did was proceed with the lesser charge which Adams had added almost as an after-thought. This dealt with fidelity contracts – an arrangement designed to ensure that Roche’s principal customers did not trade elsewhere. Eventually, after three years of investigation, the Commission ordered Roche to terminate these contracts, but it imposed only a £240,000 fine, an amount which represented less than 1 per cent of Roche’s turnover when a 10 per cent penalty could have been applied. And even that derisory sum was reduced to £150,000 three years later when the European Court of Justice upheld the Commission’s action.

For Roche, the affair was over: Adams’s difficulties had only just begun. Without knowing it, he had violated the Swiss secrecy law by disclosing Roche’s practices to the EEC, and he was arrested on 1 January 1975, as he crossed the Swiss border. (He had by then left Roche and moved to Italy to start a pig farm.) The events that follow almost defy belief. Shocked by his arrest and fearing that her husband faced prolonged imprisonment, Adams’s wife committed suicide, leaving him with three young daughters to raise. Since the right of habeas corpus does not exist in Switzerland, Adams was held for three months before trial and was not even allowed to attend his wife’s funeral. Though subsequently convicted and ordered to pay costs, he received a suspended sentence and was thus able to return to Italy. There, however, he found himself embroiled in a Kafkaesque duel with the Italian bureaucracy in an attempt to rescue the funds he had been promised to start his industrial pig farm. The effort failed, and by 1980, Adams was faced with a crushing burden of debt which threatened to expose him to further imprisonment. To escape that, he fled to Britain. He has remained here ever since, trying, with the assistance of a widely-based appeal committee, to clear his name and secure just compensation.

Adams is now 56 years old. He left Roche when he was 46 and, despite repeated efforts, has not been able to find other employment. He was branded as a ‘spy’ and a ‘traitor’ by the president of Roche: other employers are clearly reluctant to hire him. He has now given up hope of working again, and longs only for a place in the European Parliament where he can take up the fight not only against pharmaceutical firms but against multinationals in general. Anyone who picks up this book will find it hard to put down – and many who read it will want to make a donation to Adams’s appeal committee. It is true that one would like to know more about his reasons for reporting Roche to the EEC, about the suddenness of his wife’s death only ten days after his arrest, and about his inexplicable ignorance of the Swiss secrecy law. Against this must be set the fact that Adams had nothing to gain from his action, and everything to lose. His initiative was designed purely to promote the public interest, and from that standpoint his motives are irrelevant. All that really matters is Roche’s business behaviour and what the EEC did about it.

It is clear that the EEC did not do very much, and that its conduct in the case left much to be desired. Some excuse may lie in the pioneering nature of the action. Anti-trust laws are a relatively recent phenomenon in Europe and have not been pursued with the same vigour as in America. Cartels have plagued European enterprise for generations; it will take some time for the free-trade ideal which is implicit in the Common Market to have a loosening effect. Though the officials in charge of the EEC’s Competition Department embarked on the Adams case with a great deal of energy, they appear to have been stopped by others who did not want to jeopardise the benefits offered by the Swiss Agreement. No doubt it also did not take them long to realise that consumer support within EEC circles was no match for the overwhelming pressure that multinationals can muster.

As it turned out, members of the Common Market acted more forcefully than the EEC itself. Britain was the first to order Roche to cut the price of Valium and Librium; West Germany and Denmark followed suit. Indeed, British action on prescription drugs partly inspired Adams to move on the products on which he worked – bulk vitamins and chemicals. Perhaps these products offer less scope for action than prescription drugs, because, with the latter, consumer pressure is stronger. This was certainly the case in Britain where the massive purchasing power of the National Health Service supplied an effective countervailing force to Roche. Conversely, America has virtually no control over drug prices because of its small state health-care sector. Though the country acts more vigorously in anti-trust matters, it is impotent when it comes to price reductions on drugs like Valium.

In retrospect, it certainly does not seem wise for the EEC to have tried to establish a precedent with a Swiss firm. Secrecy is vital to the Swiss economy because of the country’s dependence on its banking system. As Karl Otto Pohl, President of West Germany’s Bundesbank, once put it, ‘Switzerland is not a country, it’s a bank’ – and Roche’s two leading officials had been senior officers with the Union Bank of Switzerland, the country’s largest bank, before joining the Basle firm. It is therefore hardly surprising that the Swiss should have placed their own laws above the Treaty of Rome. However, this made it absolutely essential to protect Adams’s anonymity – at least until he was safely ensconced in another occupation in another country – and that the EEC failed to do. The ‘ultimate horror’ for Adams was his discovery in 1980 that the EEC’s Competition Department had been responsible for his undoing. Not only did the Department fail to protect his identity but, even worse, it did not warn him to stay out of Switzerland until it was too late. Yet the Department took infinite care to keep its own officials out of the country during the course of their investigations. As a final insult, the EEC forced Adams to accept £20,000 as compensation – which was less than one-fifth of the enormous debts he had accumulated.

Political sympathies, as Adams’s case makes clear, offer no guide to anti-trust behaviour. He has been helped most by (Labour) Members of the European Parliament but he has discovered friends and enemies on both sides of the political spectrum. The EEC official who headed the Competition Department that allowed Adams’s name to become known was a German socialist – and virtually the only attack on him in Britain has come from a Labour peer. Conversely, it was the director of Aims of Industry, spurred on by the President of Tate and Lyle and his wife, who were most helpful to him when he decided to settle here. And it was Timothy Raison, a Conservative minister, who eventually granted him permission to stay. Technically a Maltese subject, Adams has always looked to Britain for support during his long ordeal.

Adams hopes his book will serve as an inspiration to other ‘potential whistle-blowers’. In this, he is sadly mistaken: no one who reads this book will want to risk a similar ordeal. Adams may have been treated particularly harshly by the Swiss because they wanted to make an example of him, but other countries, including Britain, also have secrecy laws. And, in any event, who wants to have his reputation ruined by being denounced as a ‘spy’ and a ‘traitor’? The fact that Roche is a pharmaceutical firm had little relevance to the issues involved: the charges were concerned with trading practices that might apply to any industry, and that is why Adams is now so anxious to take up the cudgels against multinationals generally. The Labour peer who attacked Adams exonerated Roche because its offences were ‘purely commercial’. Had Roche’s actions endangered human life then he – and the Swiss authorities – might have reacted differently. The Italians certainly did when a chemical plant owned by a Roche subsidiary exploded in Seveso.

In the Third World, however, pharmaceutical firms appear to act without fear of retribution. In Prescriptions for Death, Milton Silverman and his colleagues show how drugs which have been banned in the industrial world may be sold to an unsuspecting public in a developing country. The practice is known as ‘drug-dumping’. But that is not the only offence: equally dangerous is the sale of drugs with exaggerated claims or without adequate warnings. And such offences are not committed solely by firms from the capitalist world: companies based in the Communist bloc have been equally guilty. Developing nations make easy targets for lax pharmaceutical practices. Their people are more gullible and their governments less protective, partly because of their dependence on foreign aid. If bribery does not work, then multinational firms from powerful lending nations have other means of applying pressure on poverty-stricken creditors. One way out of this dilemma is to develop your own pharmaceutical industry, and Gary Gereffi, in a fascinating and well-documented work, shows the difficulties that may arise.

Gereffi’s case-study of Mexico is particularly revealing. In 1955, this country had a firm, Syntex, which not only satisfied national needs but dominated world production of steroid hormones, most widely used in the form of cortisone. Mexico’s privileged position arose from its abundant possession of a plant called barbasco which enabled a wide variety of steroids to be produced on a large scale. Ironically, American anti-trust laws proved to be the firm’s undoing. When Syntex tried to force the American drug firms who were its main customers to buy from it rather than anyone else, these clients used the antitrust law to undermine Syntex’s position. Here is what the President of The Upjohn Company, Syntex’s biggest client, wrote in protest: ‘It is contrary to our concept of good business practice to permit ourselves to become dependent upon a single source of supply for an important raw material. Moreover, to be required to deal with any given supplier violates the principles of free trade and competition which we firmly believe are in the best interests of everyone.’ Yet it can be seen from John Braithwaite’s absorbing study of Corporate Crime in the Pharmaceutical Industry that Upjohn was at that very moment part of a producer’s cartel which, from 1953 to 1960, controlled the price of broad-spectrum antibiotics (particularly tetracycline).

The problem, as these books show, is an international one, since drug firms, more than any other, span the world. Indeed, among multinationals generally, drug firms provide the clearest example of the abuses such corporations can commit. Of these, probably the most widespread concerns tax-avoidance through a method known as ‘transfer pricing’ – the procedure by which a firm spanning national frontiers can shift profits from high-tax to low-tax areas simply by charging higher prices for the imported materials used in production. For a pharmaceutical firm, this is an easy matter because its chemical ingredients, as well as its end-products, are so light and transportable. Adams complains of Roche’s transfer-pricing practices in his book, but he does not indicate whether they were included in the charges he made to the EEC. Thus far, it seems, neither the EEC nor any of its constituent members has seriously tried to tackle this problem, but 12 states in America have adopted a system known as ‘unitary taxation’: a method which takes account not only of stated worldwide income but of local sales, property and payroll activities to make sure that a multinational firm pays its fair share of local taxation. Though the device has come under attack in British quarters, there seems to be no surer way of dealing with the effects of transfer pricing.

Where drug safety is concerned, the problem is not only more difficult but a great deal more important. Developing countries are not the only ones that need protection: as the thalidomide disaster so tragically revealed, the developed world may be at risk too. Yet safety methods must be devised in such a way so as not to destroy innovation, and that is why the public ownership method, favoured by so many on the left, offers no feasible solution. The world derives immense benefit from new drugs, but the profit motive seems essential for their development. In this connection, it is sobering to note that not one major new drug has emerged from the Communist bloc. Indeed, the Soviet pharmaceutical industry is the laughing-stock of the scientific community. If Soviet leaders had put as much effort into the drugs race as they have put into the arms race, the world might now have a cure for cancer.

Public ownership only seems wrong where research and development are concerned: some form of utility regulation may well have a place in the field of production and distribution. This is where the industry’s main abuses occur and where the profit motive seems to operate to the detriment of public safety. To understand why, we need to recognise the monopolistic tendencies inherent in drug production. Most countries grant exclusive manufacturing rights (in the form of patent protection) to firms which develop new drugs. But the costs of drug development are enormous and it may take years before marketing can begin. In America, safety standards are now so stringent that as many as seven years out of a drug’s 17-year patent life may expire before the product begins to earn a profit. (In Britain, a patent runs for 16 years and safety regulations are less stringent, but the risks involved are still very large.)

All of this puts terrific pressure on drug companies to exploit patent privileges and try to extend them beyond the life of the patent by means of brand names and extravagant promotional techniques. Because safety standards in the Third World are less stringent, drug firms may also be tempted to distribute their products there before they have been approved in the developed world. One practice leads to another and a firm may be engaged in ‘drug-dumping’ before the top management even knows what is happening.

In the face of these pressures, Roche’s behaviour appears to be no different from that of any other drug company. Indeed, in some respects it is better. Though Roche has been forced to cut drug prices in Europe, in America it has led the way in adopting a uniform pricing policy for government agencies. And though Silverman and his colleagues record some unsavoury practices in the Third World, Roche can take pride in the number of its specialities that are included in the World Health Organisation list of essential drugs. With 16 out of 234, it has more than any other company. Furthermore, though Braithwaite also found Roche guilty of corporate crimes in developing countries, he notes that in at least two such countries (Indonesia and the Philippines), as well as Switzerland itself, the company has adopted many of the safety standards set in America.

Nonetheless, monopolistic tendencies are deeply rooted in Roche’s behaviour, as they are in the rest of the pharmaceutical industry. Only its financial power sets Roche apart. Thanks to Valium and Librium, it has accumulated enormous reserves: in 1971, it was described as ‘one of the most profitable enterprises on earth’ – and today it is even richer. This gives Roche the means to do what every drug company strives for – ‘to seize and hold the “high ground” of the market before competitors can get there’, as Robert Ball put it in the August 1971 issue of Fortune.

It is the economics of the industry that are at fault, not the firm itself, and it is unrealistic to expect that anti-trust action would achieve very much. What is needed is a change in the way the industry operates, and here some reform of the patent system is long overdue. The patent is given as a reward for developing a new drug, but the money can be realised only through production and distribution. Too often, that leads to abuses in pricing policy and much else. Pharmaceutical firms try to justify their behaviour on the grounds of the risks involved and the need to generate more funds for research and development. But the way it operates now the rewards seem unduly large. If the risks were really so great, one would expect more firms to go under. Few do. Instead of awarding patents, the state should grant money. And the amount should be sufficient not only to cover the costs of past research but to encourage new development. In return, the state itself could undertake production, or if that is too ambitious, it should regulate the way it is done by the industry. Prices and promotional policies would be closely controlled, uniform quality standards assured, and the state could take its share of the profits in the form of royalties.

Ideally, a complete break should be sought between research and production: competition and innovation are needed on the development end, but safety and access – in the form of lower prices – are what the public requires when it comes to distribution. Perhaps the emerging science of biotechnology, which holds out the promise of a sharp reduction in research costs and greatly enhanced prospects of discovery, will help to bring about this separation. Today, instead of laboriously checking one chemical after another to see which might make a useful drug, scientists can identify the substances that form the body’s natural defences and concentrate their efforts there. A plethora of biotechnology firms have started up in recent years, but their future is clouded by the immense costs of production. If they could be rewarded for innovation alone, a sharp competitive edge could be thrust into the research end of the pharmaceutical industry.

If this proves to be too ambitious, we may have to settle for lesser reforms like strict price controls, a ban on brand names and expense limits on production. On the other hand, America seems to have gone too far in the way of safety regulation and some loosening is needed there so as not to stifle innovation. The Third World requires international help because it lacks the means to deal with pharmaceutical demands, and in this area the World Health Organisation has already made important contributions. But however it is done, reform must come, for, as Braithwaite demonstrates in his carefully-researched study, corporate crime appears to be more wide-spread among drug firms than any other companies. The problem must, however, be approached pragmatically. It is easy to blame the industry’s sins on multinationals and the profit motive but, as Braithwaite points out, many corporate crimes have nothing to do with profit, and where the all-important consideration of drug safety is concerned, multinationals have a better record than the rest of the industry. Indeed, in Third World countries, they do more to raise production standards than the governments themselves. Reformers would do well to heed the warning given by Silverman and his colleagues: there is, they say, a ‘real danger’ that the issue of drug industry control will ‘degenerate into another noisy, haemorrhagic confrontation of capitalism and socialism, with matters of political economy totally overshadowing pharmacological and pharmaceutical realities’.